Equalisation Levy

Q. What is Equalisation levy?

A. Equalisation levy at 6% has been in force since 2016 on payment exceeding Rs 1 lakh a year to a non-resident service provider for online advertisements. The amendments to the Finance Act, 2020 had expanded the ambit of the equalisation levy for non-resident e-commerce operators involved in supply of services, including online sale of goods and provision of services, with the levy at the rate of 2% effective April 1, 2020. The tax applies on e-commerce transactions on websites such as Amazon.

Q. Why in news?

The government has said that it is not considering extending the deadline for payment of Equalisation Levy by non-resident e-commerce players. 

Q. Why it was introduced in India?

A. Rise in IT has led to surge in supply and demand of digital services, consequently, this has given rise to various new business models, where there is a heavy reliance on digital and telecommunication networks.

As a result, the new business models have come with a set of new tax challenges in terms of nexus, characterisation and valuation of data and user contribution.

To bring in clarity in this regard, the government introduced in the Budget 2016, the equalisation levy.

Q. What was the need for equalisation levy?

A. The levy is seen aimed at taxing foreign companies which have a significant local client base in India but were billing them through their offshore units, effectively escaping the country’s tax system.

Q. What are penalty under it?

A. As per law, late-payment would attract interest at the rate of 1% per month or part of the month. Non-payment could result in a penalty equal to the amount of equalisation levy, along with interest.

Q. What are the issues now?

• Tax experts point out that there are practical difficulties in getting PAN and many companies are not paying the equalisation levy as there is still considerable confusion and lack of clarity on the applicability of the same.
• It is believed that the requirement of having a PAN and an Indian bank account could cause administrative delays in remittance by non-residents.
• The levy has several issues that primarily include wide coverage (even non-e-commerce companies could be covered), lack of clarity on how consideration needs to be determined especially in cases where the income is minuscule compared to the transactions facilitated by the non-resident e-commerce operators.
• Even transactions between non-residents are covered and this according to tax experts would be an extraterritorial overreach along with practical difficulty in implementation.

Q. What are its applicability?

A. Equalisation Levy is a direct tax, which is withheld at the time of payment by the service recipient. The two conditions to be met to be liable to the levy:

• The payment should be made to a non-resident service provider;
• The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.